ITC Rules for Common Credit under GST

Under Goods and Services Tax (GST), a taxpayer can only claim an Input Tax Credit (ITC) on the input goods and services used only for business purposes. Section 16 of the CGST Act, which lays down the eligibility conditions for a taxpayer to claim ITC, lists this as one of the several conditions. Often, a taxpayer uses inputs for personal and business use. For example, paying a chartered accountant to file a taxpayer's personal ITR and conducting a tax audit would amount to credit used for personal and business purposes. Can taxpayers claim the entire amount paid as ITC? Read and find out.

What is common credit under GST?

When the same assets and inputs are used by the taxpayer for both business and personal purposes, the ITC will fall under the common credit under GST.

For example, Ms. Anita owns a grocery shop. She rents a two-storey building and uses the ground floor for her shop and the first floor of the same building as her residence. The input credit of GST paid on rent will be allowed only to the extent it pertains to her business. Ms. Anita also has attached land where she grows vegetables and sells them in her shop.

The same or common property is used for three separate reasons—taxable sales, exempted sales (vegetable), and personal expenses (residence). While Ms Anita is eligible to claim input credit for GST paid on her business expenses, some of the expenses are used for both business and non-business purposes. The GST in rent (GST is applicable since it is let out for commercial purposes) is the common credit.

Why is common credit important?

ITC is only available for business purposes. Many traders use the same inputs for both business and personal purposes. A taxpayer cannot claim any input credit for GST paid on personal expenses. Again, goods exempted under GST already enjoy 0% GST. ITC cannot be claimed for inputs used in such exempted goods as it will lead to negative taxation.

So, ITC on inputs for exempted goods will also have to be removed. The following will help you to calculate the common credit that belongs to personal supplies & exempted supplies, leaving only the portion that pertains to taxable supplies. You can claim an amount as ITC while filing your GST Returns.

The credit that is attributable to personal supplies & exempted supplies must be reversed in Table 4 of GSTR-3B. Click here to learn about the reversal process in GSTR-3B.

Types of ITC

Calculating Common Credit

Let us understand the calculations through an example. Details for May 2024 are as follows:

• Total Input Tax available in the tax period – 1,00,000 (T)
• Value of taxable items sold in her shop – 5,00,000
• Value of vegetables sold (Agricultural activity) – 2,00,000
• Input Tax for inputs (transporting charges) for taxable items – 10,000 (T4)
• Input Tax for inputs exclusively for agricultural activity (purchasing seeds, soil, labour charges) – 20,000 (T2)
• Input Tax for inputs exclusively for personal purposes (eating out) – 5,000 (T1)
• Input Tax for inputs and services on which availing credit is not eligible (travelling by Ola to wholesalers)- 10,000 (T3)

So, Ms. Anita's total input tax will have 4 parts:

Step 1: Finding out the total eligible ITC

Available credit C1 = Total ITC – [ITC for personal supplies + ITC for exempted supplies + Non-eligible ITC] = T- (T1 +T2 +T3 ) = 1,00,000-(5000+20,000+10,000) = 65,000 

This step calculates the available credit, i.e., the total eligible credit. This is derived by removing the ITC on all personal, exempted, and non-eligible inputs. This amount will be credited to the electronic ledger. You have to reverse the common ITC for personal supplies, exempt supplies, and non-eligible supplies in your GSTR-3B.

Step 2: Finding out ITC pertaining to personal supplies & exempt supplies

Common Credit C2 = Input Tax credited to Electronic Credit Ledger (C1) – Input Tax for taxable supplies (T4 ) = 65,000 – 10,000 = 55,000 

This shows the common credit that must be shared between taxable, personal, and exempt supplies. In our example, it could be the rent paid for the building. The GST component of the residence portion will be reversed. This Common credit will be divided into 3 parts:

Step 2.1: Partly Exempted 

The portion of ITC pertaining to exempted supplies is calculated by the following formula:

So by our example,

The formula calculates the amount by the proportionate method. The amount of Rs. 22,000 is deemed to be the amount of ITC pertaining to exempted supplies (vegetables) and must be reversed in GSTR-3B.

Step 2.2: Partly Personal 
There are many common expenses such as rent, electricity, and water bills which are used for both business & personal purposes. This formula will help to segregate the amount of credit that pertains to personal purposes. D2 = 5% of Common Credit So by our example, D2 = 5% of 55,000 = 2,750 The formula calculates the amount by assuming 5% of inputs are used for personal purposes. The amount of Rs. 2,750 is deemed to be the amount of ITC pertaining to personal supplies and must be reversed in GSTR-3B.

Step 2.3: Normal portion 
Finally, we calculate the portion of common credit that pertains to the taxable supplies (such as the rent portion for the shop). C3 = Common Credit – [ITC portion for exempted supplies (D1) + ITC portion for personal supplies (D2)] = 55,000 – (22,000+2,750) = 30,250 This is the common credit attributable to normal supplies.

Step 3: Finally, calculating the total ITC you can claim 
Total eligible ITC for the month = ITC for normal supplies + Common credit for normal supplies = 10,000 + 30,250 = 40,250.

How does this impact your annual return?

The details of ITC availed through Table 4A of GSTR-3B are auto-populated in Table 6A of GSTR-9 and are non-editable. Moreover, all the details of the reversal of common credit have to be reported in Table 7 of GSTR-9.  Suppose there's a difference between the ITC of annual return & the total ITC claimed during the year. In that case, there will be a refund or interest depending on the situation, which is reported in Table 14. Now, the same calculations must be done for the whole financial year before the end of the due date of furnishing the annual return. Here, let's suppose the total eligible credit differs from the above calculations in the following manner: 

Example 1:  ITC as per annual return of 2023-24 is more than actually claimed

At year-end, total eligible credit is 50,000. Here (50,000 – 40,250) = 9,750 will be allowed to be claimed as credit for any month before November 2024. 

Example 2:  ITC as per annual return of 2023-24 is less than actually claimed

At year-end total eligible credit is 30,000 Here (40,250 – 30,000) = 10, 250 will be added to output tax liability and interest @ 18% would be payable from 1st April 2024 till date of actual payment. 

From the above calculations, it is clear that the ITC Rules for Common Credit under GST were meant to be followed strictly to avoid interest and other recovery mechanisms.

Clear GST Software will handle your ITC by automatically calculating the common credit. We also have a GST Calculator that will calculate your tax liability well in advance so that you are ready.

Read more: Input Tax Credit under GST - Conditions To Claim